Sunday, December 28, 2014

"Dead Cat Bounce"

      After 2008 the Global Economy has been in what has been known as a "Dead Cat Bounce".  In finance, a "dead cat bounce" is a small, brief recovery in the price of a declining stock (or declining prices). It derived from the idea that "even a dead cat will bounce if it falls from a great height", the phrase, which originated on Wall Street, is also popularly applied to any case where a subject experiences a brief resurgence during or following a severe decline.  A temporary recovery from a prolonged decline or bear market, followed by the continuation of the downtrend. A "dead cat bounce" is a small, short-lived recovery in the price of a declining security. Frequently, downtrends are interrupted by brief periods of recovery - or small rallies - where prices temporarily rise. This can be a result of traders or investors closing out short positions or buying on the assumption that the security has reached a bottom. A "dead cat bounce" is a price pattern that is usually identified in hindsight by experts and analysts. 

     Presently much of the resurgence in the Global Stock Markets since 2008 has been due to Speculators and "Dumb Money" jumping in trying and make as much money as they can and trying to overwrite much of their earlier losses.  Similar to an addict at the Casino, or a Gambling addict, "tomorrow will be different than yesterday" and so Investors jump in at the first sign of positivity from Speculators.

     Currently in Canada, property prices have risen in leaps and bounds since 2008 because of money fleeing from Hong Kong and China and investing in major cities in Canada.  For many buying property for the first time in hopes of "flipping it", the next recession will leave many with mortgages they cannot pay for.  Best case scenario, leaving many with rental property that they will have to sit on for years instead of selling it for a gain.  Worst case scenarios, having to sell property for a loss or having to foreclose.  From 2008 it has been a "Seller's Market".  It is no longer a "Seller's Market".  From 2015, it will be a "Buyer's Market" and if you are willing to sit on property, many countries all over the First World will open to you.

     Banks all over the world are weak due to their lending practices that was started as early as 2000.  Having negative interest rates is allowing citizens to borrow from banks and use money in order to stimulate weak and fraying regional and national economies.  Banks have no other option now other than: 
(a) confiscating bank deposits (which was implemented in Nov 2014's G20 meeting in Australia) in order to save banks 
(b) to raise interest rates which will save their national currencies from devaluation but in doing so, will crush many citizens with debt that they have accumulated since 2008 in order to keep their "standard of living" in place.
     With oil prices and energy prices falling currently and therefore weakening National economies, many National economies are facing problems that they are hiding from their public in order to avoid mass panic. With many Corporations and Institutes slowing their hiring practices, economies are going to contract at a faster pace than has been seen in the past decade.  Prepare accordingly and change your attitude, behaviour, and expectations about the "standard of living" you have been used to. 

     "And so it begins, Collapsing crude prices are starting to make their way through the North American energy sector, as the most unprofitable oil & gas rigs are mothballed. Those flashing red numbers are not just on your screen any more.  The closures have been particularly acute in Canada, where some 40 oil & gas rigs have been taken out of operation recently. In fact it’s not clear if economists fully appreciate what’s about to transpire with the Canadian economy. This decline in rig count is just the beginning.  Consider for example the situation with the Canadian oil sands – one of the more expensive sources of crude production. Even if prices recover somewhat, oil sands production will be winding down – nobody wants to operate money-losing businesses for a prolonged period. And those who believe crude will be back above $80/bl any time soon is deluding themselves.  Up until now, production from oil sands has fueled growth in other sectors, including for example transportation and housing in Alberta. This is about come to a screeching halt.  The national situation is not significantly better. Housing markets across the country have continued to rally, even as homes south of the border had undergone an unprecedented price adjustment. While many point out that the reason for avoiding a US-style housing crash has been a stronger mortgage market, that’s only part of it. The global commodity boom in which Canada successfully participated is the main reason.  Now as the commodity super-cycle has ended and energy prices collapsed, Canadian households are caught with near-record levels of leverage.
     Some have been pointing out that Canadian mortgage debt service ratio has continued to improve. However that measure is misleading, as it excludes principal payments. In reality the situation is much worse. There is also the argument that Canada’s economy is “diversified”. Perhaps! But just to put the situation in perspective, take a look at the breakdown of the nation’s trade balances.
     While economists will attempt to analyze the impact of energy prices on various sectors separately, when it comes to Canada, a number of economic components are quite difficult to decouple from one another. What’s clear is that this exposure to energy is going to damage the labor markets, squeezing the nation’s overextended households. And the knock-on effect won’t be limited to a severe slowdown in residential construction growth. Consider for example the expenditures on renovations – something that’s been supporting parts of manufacturing and other sectors. This is not going to end well.  The markets are already sensing the contagion effect from energy on the housing market, as Canadian property REITs take a hit. If oil prices remain anywhere near the current levels for a prolonged period – something the Saudis are aiming for– Canada’s economy is in serious trouble".

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